Front Burner - Tesla’s stock is tanking. Here’s why

Episode Date: January 9, 2023

Not long ago, Tesla seemed unstoppable. But Elon Musk's electric vehicle juggernaut closed out 2022 as the worst-performing stock among the most valuable tech companies — and its shares have dipped even lower since then. Today, Patrick George — a contributing writer with Vox Media's The Verge and an editor with The Autopian — joins us for a look at where things went south for Tesla, and the hurdles the company faces going forward.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Jamie Poisson. Just a few years ago, it seemed like Tesla was completely unstoppable. Elon Musk built a car company around his vision for a more sustainable future of driving. And when it opened at the stock market in June of 2010 at $17 a share, investors were buying. Big day for CEO Elon Musk, for your company here. You expanded the offering to 13.3

million shares and the price was higher than range. Did that surprise you a little bit? No, actually, based on the response we got going through the roadshow, we had just an incredible, incredibly positive outcome from, I think, the smartest investors in the world. Tesla became one of the highest priced shares on Wall Street. At its peak in November 2021, it closed at nearly $410 U.S. At one point, Tesla's value was more than its five biggest rivals combined. It made all those gains because investors believed it could change the future. Despite gaps in production, investigations into faulty technology, product recalls,

even incidents where cars spontaneously burst into flames. About 6.20, the car spontaneously caught fire. The car burned for about four hours before firefighters were finally able to put out the flames. Tesla stayed on top. Until now. Tesla shares have fallen 73% from their record high in November 2021. Tesla has now also moved past meta to become the worst performing stock in 2022 among the most valuable tech companies. Just a week into 2023 and shares have dropped even further.

On Sunday, they sat at $113. So today, we're talking about what caused Tesla's stock to plummet, what hurdles the company faces going forward, and whether it can course correct to keep its title as leader of the EV market. My guest is Patrick George. He's a contributing editor with Vox Media's The Verge and an editor with The Autopian. Patrick, hey, thanks so much for coming on to the show. Jamie, thanks so much. Happy to be here.

So I want to get into some of the specific hurdles Tesla's facing. But firstly, just briefly, walk me through what led to, I think it's fair to say, this stock crash for Tesla back in December. Sure thing. And crash is definitely one way to put it, I think. But this has also been brewing for a very long time. I tend to break this into two overriding factors. There's the normal stuff and the weird stuff. And we can start with the normal stuff. First off is that the Tesla stock price has always been really overvalued. I think even Elon Musk has admitted that. So part of this is just sort of a natural market correction as the stock comes back down to earth a little bit, especially with the wider tech industry stock declines that we saw in 2022.

Facebook is poised potentially for the biggest single day market value wipeout in Wall Street history. Lyft shares indeed down by a record and down by even more than they were in free market trading. Overnight, Netflix stock plunging as much as 25 percent after the streaming. One of the biggest culprits here is weakening demand in China specifically, as a lot of local competitors catch up. China has a huge homegrown car industry now, scores of brands that many of us have never even heard of, but they're quite big. They're catching up very quickly. They're getting better and better all the time, and they're all electric or hybrid. And that's eating a lot of his market share in China, which is his most important

market. It's the largest car market in the world. He's also faced supply issues in China too, struggling with producing cars amid the COVID-related lockdowns that they've had in that country. So that's been a real big reason for the decline, too. And we have seen weakening demand for Tesla cars in the U.S. as well. That's the normal stuff. Now let's get into the weirder stuff here, which is the whole Twitter thing. After revolutionizing the space race and electric cars, the world's richest man is now promising a Twitter makeover,

renaming his own account Chief Twit and proclaiming the bird is freed. Elon Musk carried a kitchen sink into Twitter HQ this week, tweeting, let that sink in, then fired senior execs once closing the $44 billion deal. I think it's hard to put numbers around how much of a headache this has caused Tesla directly, but it is a major factor in the decline that we saw last year. One big problem is that we saw Musk sell $23 billion worth of his Tesla stock in 2022, much of that after he said he wasn't going to anymore in April. Presumably this is to help prop up Twitter, which he now owns personally and is running deep into the red, as he's struggling to get revenue in place at all.

S&P data showed that Twitter had less than $600 million in net debt before the takeover talks. Now, post-acquisition, they have $13 billion in debt, and that's a major burden on their shoulders. The New York Times reporting Twitter has stopped paying rent on its offices and is considering not paying severance packages to former employees. On top of that, there's so much negative press attention around his disastrous run of owning Twitter. There's a real perception out there now that Musk's attention is simply not on his car company, which is the primary source of his wealth. The end result last year is that we saw a 69% decrease in Tesla stock year over year

and a loss of about $700 billion. Wow, that's extraordinary. It is. And he's the first human being to ever personally lose $200 billion. Quite a dubious honor to get that one. It's quite a feat, hey? What has he said about why the stocks have plummeted the way that they have? Sure. Musk has spent most of last year, you know, both before and after he owned the platform on Twitter, blaming larger macroeconomic factors. He's blamed interest rate hikes. He goes after the Federal Reserve a lot. He says that the interest rate increases are going to tank the entire economy. He's not out there admitting demand is weak. He's not out there admitting that there's problems in their most important market.

And he's certainly not, you know, issuing a mea culpa around, you know, the effects that owning Twitter has had for this company. So he's blaming just a weak economy. I want to come back to Twitter in a few minutes. But first, this isn't the first time the company has faced production issues, right? Like, if anything, Tesla's actually been pretty consistent about having production issues. And I listed off a bunch of pretty incredible bad press in the intro. And what do you think it has been about the company that it has managed to survive all of that, I guess, up until now? Oh, yeah, for sure. And I do think that Tesla's faced more turmoil in the last decade than most car companies face in a century. But it is a remarkably resilient company.

It's gone from kind of a tiny, goofy startup that put laptop batteries into the Lotus Elise and sold it as the Tesla Roadster. I think global warming is a very serious issue, and it's something that we have to address, and the only way to address that is to come up with a car that doesn't add carbon emissions to the environment, and I think the way to do that is with electric vehicles. To, you know, now is the world's largest manufacturer of electric vehicles with huge factories on three continents. So it's grown tremendously. You know, you ask why it's been

so resilient. You know, for a very long time, they were the only real name in the EV game was Tesla. You know, for a large part of the last decade, most EVs were what we called compliance cars. They were Ford Focuses and Volkswagen Golfs that were fitted with batteries, low range models, very expensive. They're mostly sold to meet California's emissions requirements, which made automakers have to have an EV in their fleet. And the Teslas were worlds better than this. They had excellent range. They are extremely high performance.

They look cool. They were constantly pushing the boundaries with new features that drove the rest of the industry. So they have felt like a market leader in more ways than one. But now they're at the point where everyone is starting to catch up, too. And that's one of the most dangerous situations that Tesla faces right now. Yeah. The other car companies that are in the mix here, maybe Mercedes, Hyundai, right? Have they been as affected by the wider economic issues here or supply chain issues, production issues? Yeah, they absolutely have. And it's crucial to note that these supply chain issues we've seen have affected the entire auto industry.

In fact, early on last year, Tesla was ahead of the game because it started making its own semiconductors. And that kept it ahead of the chip shortage for a while. But all of these car companies that are rolling out new EVs, they're struggling with getting materials to make them. They're struggling with chips to put in the cars. You know, the Hyundai Ioniq 5 is one of the very best EVs on the market right now that's not a Tesla. And they're almost impossible to find. You know, the Ford Mustang BAC-E electric car, which is also excellent, that sold out in March of last year, like through the year. So all of these car companies are in for a really difficult year, just as 2022 was. But I think that some of Tesla's problems are unique and self-inflicted,

you might say at this point. Yeah, yeah. And before we get to Twitter, which I feel like is what you mean by self-inflicted, what about some of the safety issues that have come up with the car? So for people who might not know, all new Teslas come with hardware needed to autopilot and something called full self-driving capability, right? And I remember in November, a Tesla Model S caused like an eight-vehicle crash on the San Francisco Bay Bridge. The Tesla driver told the CHP his car was in full self-driving mode when it braked unexpectedly. There have been all these videos online of Teslas basically plowing down child-sized test dummies.

Jeez! These things are happening while the cars are in full self-driving mode. Like Tesla said that the videos, quote, portray unsafe and improper use of the features and that it's self-driving technology requires active driver supervision. But have any of these incidents also affected how people view the company? Yeah, great question. Well, we'll start with

defining some terms, I guess. You know, autopilot is a feature that's been around for years on Tesla. It's an advanced automated driver assistance program, you might call it, which can steer and brake and accelerate on the highway. But you have to mind it. You have to keep your hands on the wheel and your eyes on the road. And there are safeguards in place to make sure you do that. Though they don't always work that well, they can be fooled quite easily. Um, though they don't always work that well and they, they can be fooled quite easily.

Um, and I think the earlier versions of autopilot were a lot more fast and loose when it came to making sure the drivers were, um, you know, paying attention, which this is why we've had like years of these viral YouTube videos on these things crashing now. Uh, full self driving is different. Uh, that is a $15,000 option on the Tesla's. Supposedly you can identify stop signs and traffic lights. You know, it promises more advanced city driving. That has not been the case. A lot of drivers who paid for full self-driving, $15,000 is a lot of money, and they're saying it's not worth it, that it's not where it needs to be yet. I personally believe that both of those terms,

autopilot and full self-driving, never should have been used because that's not what this is. It's a driver assistance system that's meant to help out with some of the more annoying tasks of driving, like long highway road trips or just like city and city traffic. It is not a self-driving system. There are no self-driving cars that you can buy today. But the problem with Tesla is that Musk has personally tied the value of the company to the success of autopilot and full self-driving. He's even said that, you know, if we can't solve this riddle, like the company's going to be worthless. But the overwhelming focus is solving full self-driving.

So that's essential. And like, that's really the difference between Tesla being worth a lot of money and being worth basically zero. fully self-driving cars in a year, like we said. It's not right around the corner. It's going to take decades to develop this AI. You know, it's still going to require an attentive and sober human brain to operate this sort of thing. Yeah, and in the past,

Musk has made some pretty wild claims about this. In 2019, he said that, you know, Tesla owners would be making $30,000 a year deploying their cars on the road as robo-taxis. You know, you go to bed at night, and it's just like a robot Uber just earning earning passive income for you i feel very confident predicting uh autonomous robo taxis for tesla next year so expect this to operate um it's similar it's sort of like a combination of maybe the uber and airbnb model so if you own the car you can add or

subtract it to the tesla network and tesla Tesla would take 25 or 30 percent of the revenue. I don't know if anyone knows this, but that did not happen. Very far from it. So, you know, he's still tripling down on that technology when a lot of other players in the space are kind of being more realistic about it now. And fair for me to say, like, he's not making any indication that he's going to pull the technology that already exists or even change the way he talks about it. Yeah, I do not see that happening. I haven't heard him say anything about voluntarily pulling autopilot or FSD. He's been hit with fines from various U.S. regulators and European regulators before.

He doesn't care. I just don't see him slowing down much on this, even if regulators are cracking down, which they are. You know, California won't even let them advertise that it's full self-driving this year. So it is becoming more of a problem for him. I'm going to go. National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo.

50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. Let's dig into Twitter a little bit more. I know you talked about this briefly, like it's hard to kind of quantify what kind of effect him taking over Twitter is having on Tesla. But dig into it a little bit more for me.

Like, why is it that this seems to be such a big deal for people? What's happening with Twitter? And it seems to be affecting people's perception of Tesla. Yeah, for sure. I think it's crucial to note that Twitter has long been vital to Tesla's bottom line. You know, Tesla does not have a PR team anymore. They haven't in years. You know, Musk fired them all.

They don't do advertising. They don't do marketing. So he spreads PR with his tweets. Since taking over Twitter, Musk's posts per day nearly doubled, according to one analysis. And engagement with his account has skyrocketed, including an almost 100 percent increase in likes. He often would announce new features coming, even as reply tweets to people. But as Twitter's owner, it's been an utter disaster, both from the way he's treated employees to the sort of arbitrary policy decisions that he's implemented.

He says he will start charging users who want a blue tick beside their name to indicate their account is verified. Elon Musk has defended his decision to sack thousands of staff at Twitter without warning. Basically, if you can't show up at an office and you do not show up at the office, resignation accepted. End of story. Donald Trump's Twitter account restored tonight, nearly two years after the former president was suspended

due to the risk of further incitement of violence in the wake of the January 6th attack. Creating a firestorm of tweets over the weekend, posting memes and repeating a popular right-wing talking point And he's also, you know, he says he's fighting for free speech and that that free speech is vital to the future of the human race or whatever. But, you know, in doing so, he's been engaging with some real fringe characters, real fringe far-right people, folks who have been linked to QAnon, folks who have spread vaccine disinformation, folks who have been banned previously for that kind of behavior. It's turned off a lot of people. I think it's key to remember that, you know, Tesla's core customer base for a long time was very progressive minded people. You know, people who thought they were doing environmental good by driving this really great electric car. And, you know, now probably many of them are seeing this and seeing him pal around with QAnon figures. And they're getting really turned off of the brand.

They're starting to look elsewhere. They might look at Hyundai or Cadillac or BMW or something else out there. Like I talked to one owner when I wrote that story for The Verge, who told me, you know, shame on us for buying the car and for, you know, owning stock in the company and making money off of him for years. It's so interesting to me, this idea that progressives or people on the left would have naturally been inclined to support Tesla for so long. And now it's actually people on the right that are gravitating towards the company more because of what's happening on Twitter.

In that piece that you just referenced, you quoted somebody who said he's like a Thomas Edison having a Howard Hughes moment. And people might remember Howard Hughes was this billionaire portrayed by Leonardo DiCaprio in The Aviator. Be that as it may, you still have to answer for the spruce goose. It's called the Hercules! And he was super eccentric and became very reclusive and paranoid later in his life. Yeah, I thought that quote was very powerful, too.

And that came from Dan Ives, who is an analyst at Wedbush and is a big Tesla bull, Tesla long. So this is that came from a very pro Tesla person and not not one of like Elon's like short elbowed critics or shorts. And I think that that's a lot to unpack when someone says something like that. Right. I mean, I think that speaks to how much Musk is tied to the Tesla story, tied to its value, how much he's seen as as a driver of value in the world. Like, you know, in people who invested in him and backed his play in Twitter said, you know, you've created tremendous value at Tesla before. So surely you'll do the same thing at Twitter. Yes. But we are seeing some very erratic behavior for him. But we are seeing some very erratic behavior for him. And he spends much of his day tweeting out memes and replying to people on Twitter and playing customer support often for these far right figures who keep complaining that they're being censored, that their reach has been diminished. This doesn't give off the behavior of a CEO of a major car company who's facing an inflection point and needs to deal with it. So I think there is kind of an investor confidence issue that comes up when

you're wondering where Elon Musk is at, and then you're just seeing him tweet memes about people's I think that you mentioned this, but the fact that he used Tesla stocks as collateral to even buy Twitter, what effect do you think that that has had on investors' confidence? confidence. Oh, yeah. This alone has been a big part of the Tesla stock price disaster. Musk paid $44 billion. So he used, you know, the loans that he took out to purchase Twitter. He used his Tesla stock as collateral. You can probably see where this is going now. So he has to sell Tesla shares to fund the purchase, fund the losses at Twitter. Meanwhile, as the Tesla stock price plummets, his bankers and his lenders are going to start asking questions. They're going to start asking for the receipts, so to speak. And you're kind of in this cyclical scenario where his purchase of Twitter is driving down the stock price, but that's also causing his money to dwindle as well. And a lot is on the line here in a wider sense. There was a story from Reuters earlier this week that said 50 actively managed U.S. equity funds have more than 5% of their

assets in Tesla. A lot of companies are heavily invested in Tesla's success. A lot of funds are. So if this starts going sideways, it could have huge ripple effects in the market. You know, we talked earlier about some of the other big players here, some of the other car companies that are producing EVs. And just compared to these legacy automakers at this moment in 2023, what are Tesla's big weaknesses right now? weakness that company faces, honestly, is its aging lineup of cars. Let's be clear that a Tesla is an excellent car purchase. I do believe that. I think there's a lot of quality control issues they've had over the years. I think my stance on autopilot and FSD are pretty clear, but the cars are great to drive. They drive the way BMWs used to drive, is the way I like to put it. But these cars are getting old. Like in 2023, the Model S will be 10 years old. The Model X SUV will be eight years old. They both have received

significant upgrades since then. But then, you know, the big volume sellers are the Model 3 and the Model Y, the smaller sedan, the smaller crossover. Both are at the point where most automakers would have either done heavy updates or replaced them with new models entirely now. Like if Toyota made the Model S, you would be on its third, probably entirely new car iteration right now. So they're getting old and everybody else is catching up and you have these brand new, really exciting, really potent offerings coming out from Hyundai, Kia, Cadillac, BMW, a few new startups like Polestar and Fisker and Lucid. And, you know, these are sort of the hot new kids on the block, I guess you could say. And they're all running the same playbook that Musk and Tesla pioneered, but they're doing it in a newer and flashier way.

And I think that it speaks to how North Americans buy cars, right? We like to have the newest, flashiest, most attention-getting thing in our driveway. We want the neighbors to notice. You know, when cars come out that look a lot like their previous generation did, they tend not to sell well. So I think that there is a bit of a newness problem

that Tesla's facing here. And you mentioned, like, it's still a good quality car. Like, just take me through what it still does have working in its favor at this point. Yeah, there's still a good quality car. Just take me through what it still does have working in its favor at this point. Yeah, there's still a lot. I think that there's still a lot of tremendous brand loyalty in Tesla. I think that a lot of owners have been turned off by the Twitter thing. But I also, the folks I've talked to on an equal number aren't on Twitter, don't know, don't care, just want a good electric car. One of the biggest assets it has is the

supercharger network. It's coast-to-coast fast charging system. It was probably one of the best things that Tesla ever did, frankly, was rolling out supercharging. It's a very seamless, easy-to-use charging setup. You don't have to worry about rage, anxiety. The stations are all over the place. People do cross-country drives in them all the time. They're opening that network up to other cars next year with an adapter. I don't think it's going to be the most seamless thing in the world for a variety of reasons, but that's still kind of their killer app right now. So they're established. They've been doing this a long time. They have the best charging network by far. If things go really sideways for Tesla right now, what could that mean for people who already own them?

Yeah, I want to be clear. I don't think this is a moment where we could see Tesla go out of business. I think it's a real inflection point and some course correction is needed, starting with the guy who's in the top seat. Worst case scenario, there's something like, you know, like a hostile takeover by some other investors or the company changes hands to someone else. I don't think it's going to be a situation where, you know, you're going to be left with a car company from a dead brand by any means. It's too big. It's too powerful. It's got too much tied to it. I think the biggest risk that this company runs right now is becoming irrelevant or becoming stagnant in the years to come as every other competitor catches up in the EV space. Okay. Thank you so much for this. This was super interesting, Patrick. Thank you. Yeah, Jamie, it's wonderful to be here. Thank you so much.

Wonderful to be here. Thank you so much. All right. That's all for today. Thanks so much for listening to FrontBurner. We'll talk to you tomorrow. For more CBC Podcasts, go to cbc.ca slash podcasts.